[Winstonm]

So we have moved from Voodoo economics to economics of voodoo.

[y66]

From Disinflation begins by Noah Smith:

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For over a year now, we’ve seen inflation rise relentlessly. Price rises have lowered real wages for most workers, driven popular anger, and threatened economic stability. But there are finally indications that the tide is turning. In March, financial markets were predicting an annualized inflation rate of around 3.5% over the next five years; now, that number is down to 2.6%.

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[y66]

Paul Krugman said:

https://messaging-cu...a0-30e47eba5d17

One of the sad paradoxes of politics is that few economic indicators matter more for public opinion — for voters’ evaluation of the government in power — than energy prices, especially the price of gasoline. This isn’t just a U.S. phenomenon: Inflation driven by soaring energy prices has undermined the popularity of leaders across the Western world.

Why do I call this a sad paradox? Because while policy can have a big effect on overall inflation, it doesn’t have much effect on energy prices. The rates for oil, in particular, are set on world markets; even the U.S. president (let alone the leaders of smaller nations) has very little influence on that global price.

Still, given the political salience of prices at the pump, leaders have an incentive to do what they can to bring them down a bit or at least be seen making the effort. So a few days ago, President Biden tweeted an appeal to “the companies running gas stations” to “bring down the price at the pump to reflect the cost you’re paying for the product.” Indeed, wholesale gasoline prices have fallen about 80 cents a gallon since early June, while the decline in retail prices has been less sharp.

The reaction to his remark was, however, savage. Most notably, Jeff Bezos in a tweet assailed Biden for “a deep misunderstanding of market dynamics.”

Hmmm. Did Bezos check out what we know about the market dynamics of gasoline prices (or order an underling to do it)? Because if he had, he would have learned that there are some peculiar things about those dynamics — things that suggest at least some justification for Biden’s appeal. Serious research offers a lot more support for the idea that market power has played a role in recent inflation than you’d imagine from the ridicule heaped on that notion, including from Democratic-leaning economists.

Monopoly power isn’t the principal cause of inflation, which has been driven by an overheated economy plus external shocks like Russia’s invasion of Ukraine. But there’s a reasonable case that monopoly power is a cause of inflation — and blanket attacks on the mere possibility reflect, well, a deep misunderstanding of market dynamics.

So, about those gas prices. As economists at the St. Louis Fed recently pointed out, there’s a longstanding phenomenon in the fuel market known as asymmetric pass-through or, more colorfully, rockets and feathers. When oil prices shoot up, prices at the pump shoot up right along with them (the rocket). And when oil prices plunge, prices at the pump eventually fall, but much more gradually (the feather).

Why this asymmetry? There have been a number of economic papers trying to understand it, pretty much all of which stress the market power of companies that face limited competition (something Bezos surely knows a lot about.) The clearest explanation I’ve seen is in a relatively old paper by Severin Borenstein, Richard Gilbert and A. Colin Campbell. I’d summarize their argument as follows: When oil prices shoot up, owners of gas stations feel empowered not just to pass on the cost but also to raise their markups, because consumers can’t easily tell whether they’re being gouged when prices are going up everywhere. And gas stations may hang on to these extra markups for a while even when oil prices fall.

Is there evidence for this story? Yes. Notably, the rockets and feathers phenomenon seems to be strongest in areas where individual gas stations face relatively little competition.

In such a situation, badgering gas stations to get their prices down may actually make some sense. We can argue about its effectiveness, but it’s not stupid, given what we know about the relevant market dynamics.

What at least a few readers may notice is that the market power explanation of rockets and feathers — an explanation with an impeccable academic pedigree, developed by economists who had no obvious political ax to grind — is pretty much the same argument politicians like Elizabeth Warren have made about how monopoly power may have contributed to recent overall inflation. That is, some politicians argue that corporations have taken advantage of a generally inflationary environment to jack up their markups, in the belief that they will face less public backlash than they would in normal times. And this exploitation of market power has pushed inflation even higher.

Such arguments have been greeted with ridicule and horror, even from some Democratic-leaning pundits and economists. But they make sense, as illustrated by the economic literature on gasoline prices. And what appears to be true for gasoline prices could be true more generally. New research by Mike Konczal and Niko Lusiani of the Roosevelt Institute, a progressive think tank, finds that recent price increases have been largest in industries that had limited competition — as indicated by high markups — even before the pandemic. That’s the same kind of evidence that supports the view that asymmetric adjustment of gasoline prices reflects market power.

The mystery to me is why so many of my colleagues, in both the economics profession and the economics punditocracy, have had such an extremely negative reaction to any suggestion that market power might be playing a role in inflation and that presidential jawboning might make some contribution to anti-inflation strategy. <snip>

[y66]

Here's Paul Krugman explaining why the shelter component of the CPI aka Owner's Equivalent Rent lags current market rents and still has a ways to go before catching up. Since the shelter index accounts for ~40 percent of the all items less food and energy index aka the core CPI which the Fed uses to guide policy, we can expect to see continuing upward pressure on the core CPI from increasing (average) shelter costs for several months after market rents plateau (which they appear to be doing) and continuing pressure on the Fed to get inflation under control.

[kenberg]

y66, on 2022-August-19, 13:30, said:

Here's Paul Krugman explaining why the shelter component of the CPI aka Owner's Equivalent Rent lags current market rents and still has a ways to go before catching up. Since the shelter index accounts for ~40 percent of the all items less food and energy index aka the core CPI which the Fed uses to guide policy, we can expect to see continuing upward pressure on the core CPI from increasing (average) shelter costs for several months after market rents plateau (which they appear to be doing) and continuing pressure on the Fed to get inflation under control.

I have no idea of how detailed the data can be. Krugman's argument is that the push on rental prices is driven by the Virginia Woll, room of my own, effect as more people work at home and just generally spend more time at home. It seems that this effect would be stronger on three-bedroom apartments than on one-bedroom apartments. Is it?

Like many/most people there was a time when I lived in pretty basic living quarters. Maybe I'll see if I can see what a similar place would cost today, and compare this with inflation.

[y66]

Fed Chair Jay Powell said:

At past Jackson Hole conferences, I have discussed broad topics such as the ever-changing structure of the economy and the challenges of conducting monetary policy under high uncertainty. Today, my remarks will be shorter, my focus narrower, and my message more direct…

Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain…

July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting… At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases. [Josh adds: the subtext here from the “at some point” is that while the rate increases will get smaller eventually, September is still likely to be another 75-basis-point increase.]

[W]e must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

[y66]

From Paul Krugman:

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For as long as I’ve been paying attention to economic news, pundits and investors have waited anxiously for the monthly report by the Bureau of Labor Statistics on the employment situation. That’s still true, and there was some important news in today’s report. More on that later.

But another report from the bureau, which came out on Tuesday, was a real eye-opener. It was, in particular, the best news about inflation we’ve seen in a long time — even though it never mentioned inflation.

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Let me offer a quick-and-dirty, though nerdy, way to understand that report’s implications. The following picture shows unemployment versus vacancies — the Beveridge curve — with each point representing that relationship at intervals over the past 15 years and with unemployment truncated at 8 percent to exclude the depths of the pandemic slump:

Not so ugly after all?Bureau of Labor Statistics, author’s doodling

Until August, vacancies were much higher than prepandemic experience suggested they should be for any given rate of unemployment. The red line represents eyeball econometrics — not a formal statistical estimate but my rough take on the apparent trade-off between unemployment and job offerings during the recovery from the pandemic slump.

The green dotted line shows combinations of unemployment and vacancies that would yield the same vacancy ratio that prevailed in 2019, when inflation wasn’t a problem. (For sticklers: It shows the ratio of vacancy to unemployment rates, which isn’t exactly the measure Ball et al use, but that’s a trivial difference.)

What you can see (from the intersection of the solid red and dotted green lines) is that until very recently, it looked as if restoring the prepandemic vacancy ratio would indeed require something like 5 percent unemployment.

But August was significantly below the red line. It’s only one month’s data, but it suggests that the trade-offs may be improving as the economy recovers from Covid disruptions. A high unemployment rate may not be necessary after all.

[sharon j]

I find economics at the national level difficult to understand. I hope it is ok to post a link here to a couple of John Stewart podcasts that discusses it. I found the broadcast "How Do We Fix the Economy?" especially interesting. https://www.youtube....ewart+economist